SPA 2007: International structured products market focused more on open architecture, panel says

By Sheri Kasprzak

New York, March 26 - Even though the United States may be on its way to an open architecture system within the structured products marketplace, such open architecture already exists in Europe, Asia and Australia, according to an international panel at Monday's Structured Products Association conference in New York.

"You can't just source in house anymore," said Johan Groothaert of Deutsche Bank AG New York, speaking about the European structured products market.

"It's becoming a liability if it turns out that the products you're selling are not performing well. If 60% to 70% of your products are done in house, the buyers will come back and say 'It can't be that 60% to 70% of the best products are at your bank because when I go another bank, I'll get another answer.'"

Open architecture in the Asian and Australian market, according to Peter Moses of Macquarie Bank, is also being driven by clients.

Moses described the Asian market in particular as "bipolar investment disorder."

"They will invest a large amount of money in risk-free, cash-only investments and not mess with it at all and then what's left, they will have a massive sweep. It's not uncommon to go to three or four banks and move within the three or four banks if you're not getting the best price or exposure to the best products," Moses said.

Open architecture in Europe, Goothaert said, will likely be achieved completely through regulatory demand. In the United States, he said, open architecture will likely arrive after litigation and then regulatory requirement.

"In Europe and Asia, it's just happening right now," he said of open architecture.

In Asia in particular, Moses said, it took a couple of years for open architecture to catch on.

"It wasn't overnight," he said. "I do find it a bit baffling, given the U.S.'s litigious nature."

U.S. education needed

But in order for U.S.-based investment banks to adopt a culture of open architecture, investors need to become more educated, according to a second panel of sell-side industry insiders.

The panel said open architecture has been a "drumbeat" in the U.S. market but there hasn't been a lot of action on the subject yet.

"There has been a ramp up in products that is greater than the number of shops opening up," said Michael Clark of Credit Suisse. "In the U.S. marketplace, structured products as a percentage of portfolios is very tiny. In the Swiss market, it makes up 40% to 50% of the portfolios."

High net worth clients, Clark said, are not going to other banks to shop around for structured products.

"This tells me that there's an education job to be done," he said. "Once the clients know the market well, then there will be an increased need for shopping around."

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